Net Present Value, usually the abbreviation NPV is used. It is one of the best and most widely used financial criteria. The whole life of the project is included in it, also the possibility to invest in another equally risk project. It takes into account the time value of money and it depends only on the anticipated cash flows and opportunity cost of capital.
- NPV… net present value
- CFt… cash flows for each year
- n… lifetime of the project
- r… discount interest rate
The advantage of this method is that it can describe any cash flow, and the fact that the result is the absolute value of the benefit of investment in current prices. The resulting value indicates how much money the implementation of the investment will bring to the enterprise. If the NPV is positive, the project is acceptable. In contrary, if it is negative value, the project is unacceptable. The higher NPV is preferred for comparison of multiple investment options.